Open Letter to Premier Stelmach from Ian Langdon

11 October 2007

Office of the Premier
Room 307, Legislative Building
10800 – 97th Avenue
Edmonton, AB T5K 2B6

Attention: Honourable Ed Stelmach, Premier

Dear Premier Stelmach:

RE: Alberta Royalty Review Panel’s Report

Position

I do not support the implementation of the recommendations of the Royalty Review Panel’s final report.

Why do I have that position?

It has been established in a transparent manner by reputable sources such as Canaccord Adams and Tristone Capital that the Royalty Review Panel’s report “Our Fair Share” is a flawed document. I have studied these documents thoroughly and concur with the points they make.

I have further concerns which the reports from Canaccord and Tristone do not address directly.

First is the misnomer of the report’s title “Our Fair Share”. This was made clear when its primary information source, petroleum fiscal consultant Petro van Meurs recently stated that his business was “to get the best possible deal for them”, referring to the governing jurisdiction. This clearly demonstrates that the Royalty Review Panel was never about securing a “fair” approach to royalties. It shows the entire process was about securing the highest possible government royalty share without the complete destruction of the local petroleum industry.

It is also clear that the Royalty Review Panel did not complete and or report all the tasks required of it as outlined in its terms of reference. This failure gives the Progressive Conservatives a clear “out” in terms of not accepting the Panel’s conclusions or recommendations as they stand.

The first term of reference was: “How Alberta’s royalty system compares to other oil and gas producing jurisdictions, taking into account investment economics, industry returns and risks in Alberta”

The panel demonstrated its understanding by stating: “An important aspect of Alberta’s royalty system is how it compares with those in other regions that produce oil and natural gas. We will be examining the similarities and differences in the various approaches to help us assess whether or not Albertans are receiving a fair share, as owners of the resource, and the attractiveness of Alberta as a place for oil and gas companies to invest.”

The panel then essentially ignored its responsibility to diligently complete that term of reference, or at least in reporting its findings. There is no comprehensive presentation of comparative investment economics, industry returns, or risks. There are only presentations of government revenue shares from a small subset of petroleum fiscal systems in the world. There is no cognitive discussion as to why certain jurisdictions such as Libya or Jordan were selected and felt to be comparable to Alberta, while Saskatchewan and British Columbia were excluded from the entire report. Why are Ecuador and Venezuela selected while Colombia is excluded? It appears that the jurisdictions have been selected solely on the basis of having exceptionally high government take from their petroleum resources.

I have worked in international oil and gas. Specifically, I’ve worked extensively in a jurisdiction that is used many times as a comparative to Alberta in the Royalty Review Panel’s charts, Ecuador. I can say with a strong degree of confidence as a petroleum professional knowledgeable in development, economics, and fiscal systems that making direct comparisons of fiscal terms between Ecuador and Alberta is ridiculous.

Alberta is characterized by low rate and reserve wells, a high cost local workforce, extreme climatic challenges, difficult to characterize and hard to find reservoirs, frequent but expensive access to petroleum lands via the crown land sale system. Those are all “tough points” which are balanced by an assumed low political risk based on Alberta’s stable history and fair business environment. Producers respond by developing projects with low rates of return, long life, and to maximize the resource that is ultimately recoverable.

Ecuador is nearly the opposite in all respects. It is characterized by high rate and reserve wells, a low cost local workforce, favourable physical climate, easy to characterize and find reservoirs, and rare but cheap access to petroleum lands via a block bidding process. These are generally “easy points” which are balanced by an extraordinarily high political risk based on that nation’s turbulent history. Producers respond by developing projects with high rates of return and short life, which sometimes reduces the resource that is ultimately recoverable.

The result is that Ecuador can and does charge significantly higher royalty rates to its industry and can still obtain some investment capital. I think this approach costs Ecuador a lot in the long term, but this doesn’t seem to sway government actions there. The misfortune of the people of Ecuador in having a government that mismanages their economic development should not befall upon Albertans too.

The average well I was involved with in Ecuador had an initial rate of approximately 1000 barrels per day; and I can’t recall drilling a dry hole in approximately 50 drills. In Alberta, the average well is approximately 30 barrels a day for a start rate, and I can assure you that industry drills a far higher percentage of dry holes even if sometimes it doesn’t recognize reality and classifies them as standing or suspended.

The sixth term of reference was: “The economic and fiscal impacts of any possible changes to the royalty and corporate tax systems”

The panel demonstrated its understanding by stating: “Oil and natural gas are important to Alberta’s economy. If we determine that some changes are appropriate, we also will need to assess the impacts these changes may have on Alberta’s economy and the financial situation of the province.”

Clearly, the panel did not do its work or there would be no surprise at the dramatic decreases in capital spending and associated job losses that are being announced by all participants in the industry. I can assure you that Encana, Canadian Natural, Talisman, Petro-Canada, and anyone else who has actually run detailed economic models on the proposed fiscal regime are not “bluffing” or “bullying” when they state the impact of the regime. Business is business. They’ve applied the proposed fiscal regime to their own capital programs and have found that under the proposed structure a huge percentage of their capital programs are no longer economic.

I see nowhere in the “Our Fair Share” document quantification of the financial or fiscal impacts to the Alberta economy. Surely there must be some detailed macro-economic study which examines the impact of such a fiscal change under various parameters. Either this work has not been done, or is being hidden from Albertans. In either event, the Panel failed in this duty which it was tasked to undertake and report such findings. That alone is enough to shelve the report until the required work is done, reported properly to Albertans, and reflected upon in an open manner.

The impact of the current fiscal regime has been to turn Alberta into one of the world’s strongest economies. Over a mere decade Calgary has emerged from being a second tier city in Canada to being neck and neck with Toronto in terms of corporate head offices and national influence. This is an amazing success, and something the Alberta Progressive Conservatives and Albertans as a whole can rightfully claim pride to.

Establishing Alberta as a world-class business centre with attendant business professionals, intellectuals and services is simply the best thing that could happen to give Alberta the hope of a future that will stay prosperous in a world beyond petroleum. However, a direct attack on what is currently the largest business in the province, as implementation of the Royalty Review report would be, would have a devastating long term impact on the development of Alberta as a world class place of business.

The last concern I have is that I cannot believe that full implementation of the report will actually produce more revenue to the provincial treasury. Certainly no detailed work has been done and/or made available to the public to demonstrate that more revenues would result. When one considers the following I cannot see how the province will actually receive a larger chunk of revenue that it currently secures:

§ reduction of crown petroleum lease bonuses
§ probable increased transfer payments to the federal government
§ declining hydrocarbon production due to lack of reinvestment
§ reduction in personal and corporate income tax base
§ reduction in intellectual capital due to emigration of some of the province’s best and brightest citizens
§ reduction in reputation as a place to do business.

Who am I and Why Do I Care?

I’m a third generation Albertan. One of my Grandmothers was born in Alberta before 1905, hence her birth certificate states the place of birth as the Northwest Territories. I grew up on our family farm, which was homesteaded by my Grandfather after a long hike up the Edson Trail, prior to the railway getting up to the Peace River country.

My parents figured there wasn’t much future in farming and strongly encouraged me to obtain the skills for another vocation. I went to the city and graduated with a Petroleum Engineering degree in 1987 from the University of Alberta. I left university with only an education, an attitude to get to work, and a rather staggering student loan to pay off.

Times were very difficult in the oil industry then. A friend convinced me that getting into the oil industry at its bottom was a good idea. He said that because the world was depleting its non-renewable oil and gas reserves the oil industry was a great place to be for someone with the mind to figure out how to win the reserves out of the ground.

Things didn’t start out that well. I wasn’t able to obtain full time work for nearly a year after graduating. During this period friends who went into other lines of work like Education or Nursing were buying houses and new cars and living the good life. They had security of employment and took full advantage of the depressed state of the Alberta economy by getting their houses cheap. Due to the brutal economic conditions in the oil and gas sector my employment situation was always tenuous and I had no ability to purchase a home, so I lived in a shared basement suite from which I could search for work. There was simply no room in my life at that time for house or car payments. I carried on a string of casual employment opportunities and was terrified of not being able to keep working and being left with debts and no way to service them.

I eventually did obtain full time work with Petro-Canada. I learned a lot there. I became accustomed to seeing approximately 30% of the staff of Petro-Canada laid off in mass terminations every year. I figured though that I was cheap labour and if I worked hard and made the company money they’d see fit to keep me on staff. That attitude, coupled with a large degree of luck, kept me working at Petro-Canada.

In 1994 I was recruited by an intermediate producer called the Alberta Energy Company, or AEC. This company had a mandate to aggressively do good business by expanding the value of its assets in Alberta and beyond. I took to that company with gusto. It was a great place to be at. We did good business and grew the company dramatically.

I never worked any of the Suffield and Primrose assets that were the foundation of the company as a provincial crown corporation. I worked on new assets and in new areas, including Pelican Lake and Ecuador. At Pelican Lake my team did some extremely innovative work that resulted in well over a hundred million incremental barrels of bitumen that will be produced from Alberta.

In Ecuador I stepped into AEC’s ongoing developments and managed a team charged to give the Ecuador assets a “good old Alberta” touch; with primary goals of improving the reservoirs’ profitability and ultimate recovery. Both Encana and Ecuador profited from the results. I said many times to people in Ecuador, “If we could only do things in Ecuador as they are done in Alberta everyone in Ecuador would be as rich as an Albertan.” Imagine the irony that struck me when the Royalty Review suggested Alberta emulate Ecuador in terms of petroleum fiscal terms. I actually physically choked when I saw the comparison.

During my tenure at AEC, it merged with PanCanadian to become Encana. The merged entity is a world class petroleum company, one of the finest oil and gas companies on the planet by any measure. This was quite an accomplishment for Encana’s management team to have pulled off.

As time progressed it was more and more obvious to me that the world was indeed going to be facing an energy crisis. Demand was growing far faster than production. Reserves were not even close to being replaced. I thought surely there was no better time to heed the words of the friend that got me into the industry. I could use my mind to secure new energy reserves that would become more valuable as the commodity prices inevitably went up. There was a great deal of personal risk in taking such a step, but fortune favours the bold.

With much reservation, I elected to leave the safety of Encana to co-found a brand new company with some industry colleagues. We called it Breaker Energy, and since inception I’ve been Breaker’s Vice President of Engineering. Breaker started with five “founders” crammed into a little borrowed office with two chairs, one computer, and no salaries. Yet my household still had five mouths to feed. I laugh out loud when people talk about “oil industry fat cats.” Anyone who witnessed the start of Breaker Energy knows that at least in our corner of the industry there are no “fat cats.”

My wife and I pooled our carefully and slowly accumulated savings to contribute to the new venture. This, coupled with contributions from friends and family, formed the initial capital base allowing the Breaker team to get some computer equipment and an office lease. Off we went!

Talk about scary. The oil industry is notorious for losing investors’ money. Drilling dry holes does that. Nothing in the world is more useless or costly than drilling a dry oil or gas well. Having your friends and families’ money on the line is certainly a tool to sharpen one’s business sense! Damned if I was going to let them down. We went ahead, and we prospered.

There is an old saying in the oil industry: “oil is found in the minds of men.” We worked hard and used our minds to find oil and natural gas. We studied countless opportunities, and assembled a portfolio of assets. These assets looked like junk to an outsider. But we figured we knew better, and proceeded to demonstrate that in fact we did know better.

We took measured risks, many of which could have sunk the new company had the professional judgment the team exercised been flawed. We grew the production and reserves from these assets relentlessly. Each quarter in Breaker Energy’s three year history has seen increased production and reserves. We’ve also steadily increased Breaker’s intellectual asset base, adding some of the finest people available every chance we could afford to bring them into our team.

I can assure you that it hasn’t been easy. I can also assure you that the efforts of the fabulous team that is Breaker Energy have resulted in millions of incremental royalty barrels and dollars to the Alberta Treasury that otherwise would have never have been recovered or received.

In short, our team stepped up, took a big chance, and from our minds and hard work delivered wealth to both Breaker shareholders and the Province of Alberta. Our team has developed a quality place to work, and provided hundreds of jobs throughout Alberta to the service and supply companies who we’ve had the good fortune to work with. We’ve worked our tails off, had many sleepless nights, missed moments with family, and had to make thousands of stressful high-stakes decisions balancing conflicting demands and based on limited information.

For all that contribution I’ve actually made some money, despite government efforts to reduce that amount. First it was the trust decision, and now the pending royalty decision.

My founder’s shares have appreciated in value. I’ve never taken a nickel out of the company, knowing that its future was bright and improving every day we worked. Of note is that fact that any other Albertan could also have participated in Breaker’s success. Any Albertan could have participated with Breaker by buying Breaker shares, and I’m pleased to say that many Albertans did.

In short, I can attest that I am an expert in the Petroleum Business by formal education, experience, and demonstrated execution. People who have never “done it” seem to have the impression that the energy business is easy and that big fat profits simply roll in the door. Nothing could be further from the truth. If that were true everyone would be doing it. The fact is that to be successful an extraordinary combination of technical skills, business skills, determination and comfort with extreme risk is required.

We aren’t high flyers. My family continues to live the same older house which has not been renovated, complete with 20 year old living room furniture and kids doubled up in bunk beds. We drive older non-luxury vehicles. My wife has health issues and one of my four children has special needs, which despite obligatory legislation the government has never stepped up to address so I must pay from my own pocket at considerable expense and time to see addressed.

I know that the immediate response of a skeptical reader will be “Oh, he’s an oil and gas executive; of course he’s going to be against the Royalty Review as it will cost him money! What a greedy clod!”

The rebuttal to that thought takes some explanation. The royalty review may, in the short term, reduce my capital base by a fairly significant fraction. But my opposition to the position of the Royalty Review Panel is not based on short-term thinking, or thinking of what will maximize my benefit.

I’ve got long-term roots in Alberta. I’m not going to say that I won’t do business in Alberta anymore. Business is business. I will in the future calculate political risk more into my investment decisions, however. Indeed, if the Royalty Review goes through as proposed there may be literally a huge “garage sale” of opportunities in Alberta as many companies will no longer be able to produce a vast suite of assets profitably. In a perverse way, if the Royalty Review is enacted I will actually profit from it to a significant degree. Regrettably at other people’s expense, much as a buzzard profits from a drought. I will locate and secure niche investment opportunities that I simply have not been able to access in the current business environment. Those niche opportunities will be very lucrative, but they will be relatively small and have limited participation; unlike the large opportunities that all Albertans will lose the ability to participate in such as the business opportunities presented by the ongoing capital programs of companies such as Canadian Natural or Encana.

In a similar vein, I may be able to upgrade my tired 1960’s house into a snazzy new and larger model at a far lower cost than it would be currently. The post Royalty Review economy will support a far lower real estate price so it will be a good time to do an upgrade for those who can afford it.

I will also enjoy the benefits of less traffic and see fewer long line ups. In a post boom economy people may place a higher value on their jobs so I may see improved services of all sorts.

What applies to me also applies to a far greater extent to the people from oil and gas that have made a lot of money in the industry. The majority of the titans who have made massive fortunes on oil and gas investments will be affected somewhat in the short term, but will in the long run follow a similar course to what I envision and actually increase their relative wealth compared to an average Albertan. The Albertans who are advocating the royalty change on the basis of envy and getting back at those who have been successful in our economy will be very disappointed.

Who will be hurt? Ironically the people most hurt will be many of those who are the strongest advocates of change. The employment rate will drop. Many of those who want to “stick it to the oil companies” will find themselves out of work as the general economy slows down. People unrelated to oil and gas will be affected, like hairdressers, supermarket and hotel staff. There will be no more $15 per hour jobs to start at the counter of Tim Horton’s. Just plain, good folk who’ve been benefiting from increased job mobility and wages will soon see themselves working for less and having little ability to switch jobs or advance their careers.

Also damaged will be people who’ve undertaken leveraged investments in real estate or other businesses related or unrelated to oil and gas. The inevitable price deflation of a rapid turndown will result in many losing the capital base that secured their loans. Leverage works nicely on the way up, but is merciless on the way down. Note that this applies to people who have entered into the residential real estate market in the last year or so, as well as people who have made pure real estate investments. Five percent down on a residential real estate purchase gives little coverage for asset deflation in the housing market. Will we see the “dollar deal” days again?

I anticipate that the majority of the people who will be negatively affected will be angry, and in looking for a scapegoat will turn their attention to the leadership that turned the streets lined with gold to streets lined with lead.

That’s when Alberta political history may re-manifest itself and a new ruling party will come seemingly out of nowhere. It’s happened four times to date in Alberta history and I can’t see how the pattern won’t be repeated.

So why do I care? I care because although I’m not a political leader and have no intentions or desire to ever be one I feel a certain sense of obligation to the people who will be most affected. I am a business leader, and my kids are fourth generation Albertans. I love the blue flag with the mountains and the wheat field on it. I’m a proud Albertan, and when I see something damaging and threatening descending upon us I want to fight it off. Even more than that; after receiving the benefits of living in Alberta I have an obligation to display leadership to fight off the looming threat.

Recommended Actions

As there are both expectations and consequences to everything in life, there are expectations and consequences to the Royalty Review.

My expectations of the political leaders representing me:

I expect that as a constituent my views will be actively and publicly reflected by my MLA, who is a member of the governing party. I expect that if his party’s leadership has intentions to follow the Royalty Panel’s recommendations to any significant degree that he diligently find other members of caucus who will join him in standing up to the leadership and employ whatever means is necessary to stop this extraordinarily bad proposal.

I expect as a knowledgeable citizen that my views will be considered and reflected by the Ministers of Energy and Finance. I expect that if the Progressive Conservative Party’s leadership has a view to follow the Royalty Panel’s recommendations to any significant degree, that the Minister will formally and publicly state the negative affects that would result in the Department for which they are responsible. I expect them to employ whatever means is necessary to stop this extraordinarily bad proposal.

I expect that as a knowledgeable citizen that my views will be considered with extreme care by the Premier. I expect him to not make his decision based on the poorly crafted and incomplete Royalty Review Report, short-term polling results, or internal party rivalries. Instead, I expect him to make the decision that is truly the best for Alberta now and in the very long term. If the Premier is in a political tight spot; the failure of the panel to adequately address its terms of reference gives ample wiggle room to convene a new panel which will complete the task and arrive at a more balanced answer.

What will the consequences be of not living up to my expectations? If any politician disappoints my expectations in this matter, I will do everything democratically possible to ensure that the individuals associated with this Royalty Review are removed from public office at the first available opportunity. Sincerely,


Ian Langdon
Vice President Engineering
Breaker Energy Ltd.


cc: Mr. Ron Stevens
Alberta Deputy Premier

Honourable Lyle Oberg
Minister of Finance

Honourable Mel Knight
Minister of Energy

Mr. Denis Herard
MLA Calgary - Egmont